Economic Concepts

Question 1

• embody the general idea that, at any given price, producers are willing to produce a given amount of a good (the quantity supplied) and consumers are willing to buy a different amount (the quantity demanded)
• As the price rises, firms will be willing to supply more goods, but fewer will be demanded; conversely, as price falls, consumers will demand more goods, but fewer will be supplied.
• On a graph showing price and quantity on its two axes, this is represented by a downward-sloping demand curve and an upward-sloping supply curve
• Where the two curves intersect, there is an equilibrium; economists predict this equilibrium quantity will be produced (and consumed) in a free market.

Answer 1

Supply and Demand

Question 2

• a measure of how much one economic variable changes in response to a change in a different variable
• expressed in the form of “Every 1% change in the independent (second) variable leads to an x% change in the value of the first (dependent) variable.”
• A common example is the price elasticity of demand, which measures the degree to which the quantity demanded changes when the price is altered.

Answer 2

Elasticity

Question 3

• occurs when there is only one firm producing goods for a given market
• allows that firm to set the price higher—and thus the quantity sold lower—than would otherwise occur.
• An ____ is a similar market environment where production is dominated by a few firms, whereas a ____ is the opposite case: a market with only a single consumer.

Answer 3

Monopoly, oligopoly, monopsony

Question 4

• a tax placed on the import (common) or export (rarer) of a good
• have various — often controversial — sociopolitical goals, but economists agree that they raise consumer prices relative to equilibrium (resulting in a lower quantity demanded)
• are similar to quotas, in which a government limits the amount of a good that may be imported.

Answer 4

Tariff

Question 5

• land, labor, and capital (i.e., machinery and tools)
• modern economists sometimes add a fourth, entrepreneurship.

Answer 5

Factors of production

Question 6

• this rate refers to the percentage of the population that is actively seeking work but cannot find a job
• can be cyclical (common in seasonal industries like fieldwork), frictional (the natural time between jobs that exists in most labor markets), or structural (when workers’ skills do not match those required by open jobs).

Answer 6

Unemployment

Question 7

• a commonly used measure of the size of a country’s or state’s economy
• computed by summing consumption, investment, government expenditures, and exports, and then subtracting imports.

Answer 7

Gross Domestic Product

Question 8

• the pace at which prices are rising, usually expressed in the form “2.5% per year.”
• equivalent to the rate at which currency loses its value
• often measured by the consumer price index, which establishes a standard basket of goods that a family might buy and seeing how its total price changes over a year.

Answer 8

Inflation

Question 9

• a “price of money,” inasmuch as it is the amount one must pay to use somebody else’s money (“borrow”) for a given period of time
• the term is also used for the payment the lender (e.g., a person with a savings account) receives for loaning out his money
• Because inflation lowers the value of currency, economists routinely distinguish between nominal rates(the actual amount earned by a lender/saver) and real rates (which are corrected for the inflation rate)
• A savings account earning 5% interest is not acquiring the ability to buy more things if prices are also going up by 5% per year!

Answer 9

Interest rate

Question 10

• the idea that every pair of potential trading partners (two firms, two neighbors, two countries, etc.) can benefit by trade if they are producing at least two goods
• the counterintuitive aspect is that this result is true for every pair, no matter how unproductive one of the parties might be (in absolute terms) each party should specialize in what it does best (relative to the other party) and then trade for everything else
• David Ricardo formulated this theory with a famous example involving Britain’s cloth industry and Portugal’s wine industry.

Answer 10

Comparative advantage

Question 11

• the metaphorical notion that producers and consumers acting in their own narrow interest (e.g., by trying to maximize income from their business) will create an overall benefit to society
• this might happen by their rewarding technologies that make production more efficient, rewarding firms who can sell at lower cost, rewarding inventors who discover new processes, and so on.
• the phrase was introduced by Adam Smith in his 1776 book The Wealth of Nations, but the modern understanding (and broad-based application of the metaphor) is due to later thinkers.

Answer 11

Invisible hand